Multilateral Development Banks

Cross-debarment by MDBs could become routine

Odious Debts Online

March 22, 2007

A groundbreaking ‘cross-debarment’ by the European Bank for Reconstruction and Development (EBRD) last month could lead to companies found guilty of fraud on projects financed by one multilateral development bank routinely blacklisted by all the others too, reports the Financial Times.

Until now, companies banned from doing business with one of the development banks could carry on dealing with all the others as if nothing had happened, the Times notes, but the EBRD decision could signal a change in business as usual: multiple bank blacklistings could become the new trend.

In February, the EBRD decided to blacklist the German consulting engineer Lahmeyer International based on evidence of fraud relating to a project financed by one of the other development banks, the World Bank (the largest of the international development agencies).

Senator Richard Lugar, who as chair of the U.S. Senate Foreign Relations Committee led a two-year probe into allegations of corruption in projects funded by the World Bank and its affiliates, welcomed the decision. He called it “an important move towards consistency” on anti-corruption efforts among multilateral development banks (MDBs) and the first time any development bank had debarred a company for fraud or corruption committed in a project financed by another MDB.

Lahmeyer was first blacklisted by the World Bank late last year after the company was found guilty of bribery on a World Bank project in Lesotho. The Bank-financed Lesotho Highlands Water Project is a massive, multi-billion dollar water transfer and hydropower operation implemented by the governments of Lesotho and South Africa. Lahmeyer was found to have arranged bribery payments to Mr. Masupha Sole, the Lesotho Highlands Development Authority’s chief executive and the government official responsible for contract award and implementation under the project.

The EBRD decided to debar Lahmeyer after the company approached it to bid for work on a construction project. After examining evidence offered by the World Bank which had banned the consulting engineer from bidding on World Bank-funded projects for seven years, the EBRD notified Lahmeyer that it was considering barring the company from taking part in any of its projects, as well. Following its own sanction process, which included a meeting with Lahmeyer’s chief executive and lawyer, the Times reports EBRD sent a letter to Lahmeyer on Feb. 8 announcing it would be blacklisting the company until it improved its anti-corruption safeguards.

The EBRD’s cross-debarment is consistent with legislation Sen. Lugar’s committee proposed that was signed into law in 2005. Lugar’s legislation established U.S. policy to promote coordinated policies across multilateral development banks on issues including debarment, cross-debarment, procurement guidelines, consultant guidelines, and fiduciary standards so that a person that is debarred by one such bank is subject to a rebuttable presumption of ineligibility to conduct business with any other such bank during the specific ineligibility period.

“When projects intended to boost economic development are derailed by corruption, the poorest suffer and are cheated of projected benefits in quality health care, clean water and education,” Sen. Lugar said.

The EBRD decision also comes in the wake of a campaign by World Bank president Paul Wolfowitz to clamp down on corruption and ramp up Bank efforts to make the organization and its borrowers more accountable. To that end Wolfowitz has suspended loans to powerful countries, strengthened the Bank’s internal department of institutional integrity, reshuffled officials, and brought in new staff to achieve his goal of accountability. Part of that drive includes [PDF] rallying the different development banks to create a framework for preventing and combating fraud and corruption by cooperating more closely together and harmonizing sanction procedures.

Mr. Wolfowitz’ anti-corruption crusade has been applauded as well as criticized for not getting at the root of the problem. Among other criticisms, observers have blasted [PDF] the Bank for dragging its heels on the investigation and disbarment of companies found guilty of malpractice, fraud or bribery. Canadian engineering firm Acres International was allowed to continue bidding on Bank projects for two years after it had been convicted for bribery over its involvement in the Lesotho Highlands Water Project, for example.

Nevertheless, the World Bank’s decision to take action against Acres and Lahmeyer has sent a strong signal to other multilateral development banks.

“World Bank contracts are the bread and butter of many multinationals. As the world’s largest development agency, and the standard setter for the world’s other agencies, a World Bank blacklisting could be the death knell for a corrupt company. No more effective deterrent exists to corruption in international development projects than a World Bank debarment,” said Patricia Adams of the Canadian-based foreign-aid watchdog Probe International, in an address to Sen. Lugar’s hearing on combating corruption in MDBs in 2004.

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